Showing posts with label Double bottom formation. Show all posts
Showing posts with label Double bottom formation. Show all posts

Thursday 30 October 2008

Reviewing and Understanding Earlier Panics

On the way down, each temporary bottom during a bear trend is typically characterized by increases in fear and therefore in trading volume, with a bit of panicky dumping to mark each new interim low.

The final downside climax is most violent and usually sees the greatest trading volume. Selling pressure becomes so intense that it literally cannot be exceeded; it becomes exhausted as large numbers of the previously brave finally capitulate and sell even at obvious bargain levels.

As a large crowd jumps overboard simultaneously, the moment they are finished is why and when prices hit a bottom. This is the long-repeated profile of a final bottom, that is, the culmination of a selling frenzy and the end of a sharp downward movement in prices.

Minyanville founder, Todd Harrison, a wise commentator, says that all markets (up and down) go through 3 stages in sequence:
  • disbelief,
  • migration and
  • panic.

The panic stage is usually followed on lower volume by timid bargain-hunting. When that process runs its course and the bulls run out of guts and/or ammunition, the initial base-building or rally falters. Such failure to hold ground leads to renewed fear, which builds in a minor crescendo to a new, sometimes lower, cascade-shaped bottom on moderately high volume. The key to note here is the less dramatic price drop and volume rise than those seen earlier; the difference proves that the prior low was one of psychological exhaustion or washout.

Major market bottoms often produce a W shape on the charts over two or three months; the two bottom points need not be at exactly the same level.

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Recall the chaotic pace of trading on Oct 19, 1987, when the Dow lost 508 points (23%) and made its bottom for the move on then-record volume.

A more recent is the aftermath of the Sept 11, 2001 terrorist attacks. The US market actually closed for the rest of the week. After its re-opening on Monday, Sept 17, several trading sessions were required for the emotions and new thinking of the post 9/11 world to be worked out before the selling was all exhausted.

Re-reading reports and looking at newspaper stock-price tables from that time will provide a vivid flavour of the fear psychology that defines a market crash. If there has not been a major crash lately when you read this, the instructive value will be all the greater.

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Important bottoms are typically referred to as selling climaxes because they consist of prices falling in a cascade or waterfall shape (when plotted on a graph against time), accompanied by a sharp concentration of heavy trading volume as investor emotions widely take control and completely trample logic.

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My comments: While the bottom of the market is yet to be certain, many stocks have been sold down hugely. Studying the charts of these stocks reveal many of these stocks are already trading at their bottom for some time, even though the market continues to slip down further.

Ref: It's when you sell that counts, by Donald Cassidy